Price forecasting part 1

Tue, 2008-01-01 12:00

Producers often tell me that one bottleneck to strategic planning of marketing is not knowing which planning prices to use. Thus, I am sharing with ranchers my forecasting and marketing strategy evaluation techniques.

It consists of two parts. First, I prepare an extensive set of planning prices for the next 12-18 months. Second, I enter them into an expanded set of enterprise budgets that project the gross income, resource costs and earned economic net returns for alternative marketing strategies.

Due to limited space, this column will focus solely on the development of my latest set of suggested planning prices.

Calculating a market price line

Each week, USDA's Agriculture Marketing Service (AMS) reports prices weekly for most sale barns around the U.S. (see “More data,” page 17). Given my location and that of most of my clients, I usually focus on eastern Wyoming and western Nebraska prices.

For this column, I've used western Nebraska's sale barn summary WH-LS795 for the week of Oct. 16, which is a summary for 10 sale barns. By the way, each AMS sale barn summary has a unique AMS number, so once you find your local sale barn's number, you can access the most recent report by simply keying it into Google.

Table 1 carries the detailed market price summary data for western Nebraska. Each line represents the average weight and market price for groups of feeder calves sold.

In Table 2, I've entered each line's average weight and price into a spreadsheet. The first two columns are the input numbers from the sale barn summary sheet. The last two columns were automatically calculated from the weight column.

Columns one and two — weight and market price — graphically present the weight/price relationships for that week's sale barn sales (Figure 1). In general, we can see the well-known, price-slide phenomenon where as calf weights go up, the calf price goes down. This is the concept behind price slides used in video marketing of feeder cattle.

The small blue line is a statistically calculated straight-line price trend for western Nebraska feeder calves the week of Oct. 16. In reality, most weeks' optimum price lines are curve-linear rather than linear. By using the “cwt. squared” from Table 2 in the spreadsheets regression routine, a statistical curve-linear price line can be generated; see Figure 2. The statistical equation calculated for these western Nebraska markets is: Calf price = 224.4476661 - (26.2759365 × cwt. of calf) + (1.814615621 × cwt. 2 of calf).

This is a statistical equation of feeder-calf prices for western Nebraska for the week of Oct. 16, and graphically depicts the calculated price line for western Nebraska feeder steers for that week, shown in Figure 2. Remember that price slides are different for each alternative feeder calf weight.

My calculated market price-line equation can now be entered into any spreadsheet and used to calculate western Nebraska feeder steer prices for any weight of feeder calf for the week of Oct. 16.

Price analysis

With this price-line equation, you can begin analyzing the week's calf prices.

For example, this equation can be used to generate the price-line table (Table 3), which summarizes western Nebraska sale barn prices for the week of Oct. 16. The table presents feeder-cattle prices by 25-lb. increments.

The columns, from left to right, are feeder-calf weight, market price, price drop (price slide at that particular weight), total value per head, market value of the last pound of weight (i.e., the economists marginal price), and the market price basis (market price minus futures price).

The first few columns in Table 3 are self-explanatory. From the price drop (price slide) column, I get an indication of the actual demand for lightweight calves. When the price line is steep, the demand is high for lightweight calves. When it's flat, the demand for lightweight calves is low.

Another implication of the price drop column is that we know the value of added weight is always less than the average price. This column evaluates the economics of any production practice that adds weight, such as creep feeding or preconditioning, by using the “value of the last pound.”

The “calculated market basis” column is generated by subtracting the sale barn reported prices from the reported futures market feeder-cattle price for that month. This gives me a calculated market price basis for each alternative weight of feeder calf.

Expanding price analysis

As this calculated price line for western Nebraska gives me detailed price slides and market-price basis, I can now build a price table for feeder cattle for any futures contract month reported by the Chicago Mercantile Exchange (CME). The absolute price level is based on futures prices, while relative prices are based on western Nebraska's price slides for the week of Oct. 16. For example, Table 4 is the projected price table for fall '08 (Oct '08) feeder-cattle prices.

Using this procedure for each feeder-cattle futures contract month, I can generate planning prices for different weights of feeder cattle in key marketing months for the rest of 2007 and all of 2008.

While space precludes my listing these other planning-price tables here, Table 5 summarizes all my planning-price tables for selected marketing points in a year for the next 12-15 months. These are based on western Nebraska's sale barn price and the CME's feeder-cattle futures market, but they can be generated for any marketing region in the U.S.

Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701-238-9607 orharlan.hughes@gte.net.

Use these Web addresses to retrieve futures prices for feeder cattle, live cattle and corn: